To recap my journey on the Road to Independence, I began my business on April 1, 2007. In the beginning my plan was to use an independent broker/dealer. Circumstances changed and I ended up setting up shop as an RIA. For the first two months I did not have a place to custody assets so I spent my time in financial planning mode. By the end of the first year I had a couple million dollars in assets under management. Today, that number is nearly quadrupled. By this time next month I should have an additional million. Overall, things are looking pretty good.
This year I have spent much more time and energy refining the asset management part of the business since the financial planning portion is already well established. With a growing asset base it is imperative to have an efficient management process.
How I Get Paid
I charge a flat fee percentage based on the total amount of assets per relationship. It is not a progressive scale. For example, if the client has $900,000 I would charge 0.80% per year. If they have 1.1 million, my fee would be 0.65% annually. With this fee schedule, I actually make slightly less on the $1.1 million than I would on the $900,000. Maybe I’ll change this someday, but I think it encourages larger accounts.
I also deduct fees on a monthly basis. This works like dollar cost averaging in reverse. The client is slightly better served as it reduces the possibility of taking a larger quarterly deduction at a point when the markets have tanked. That’s what my analysis has shown.
How I Assess Risk
I have developed my own risk questionnaire. It includes a few questions from Daniel Kahneman’s work in the area of behavioral finance. I have found (in my former corporate life) that most risk questionnaires are full of fluff. I believe the role of this questionnaire is to create a starting point for discussion with the client. Moreover, these questionnaires probably don’t accurately determine the point where a client would be uncomfortable as much as they predict the point where the client becomes totally unnerved.
I have also found that clients’ answers will change based on the prevailing climate of the financial markets. In a bull market, clients tend to be more accepting of risk. In a bear, I’ve found the opposite to be true.
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Your blog is very interesting. It’s good to get the perspective of an actual practicing independent adviser. I’m a long time investor and recently registered IA in California. My question is regarding solicitors. Do you pay for prospect referrals? If not why not? Would you happen to know the industry norm for solicitor compensation? I’d very much like to get your input.
Hi Martin,
Thanks for your comments. I do not pay for referrals. I thank them and may take them to lunch to show my gratitude, but no money changes hands as a result of a referral. I have no idea what an industry norm would be, but some might share revenue (i.e.; a % of the asset mgmt fee).
I wish you well,
Mike
Thanks for your response. I’ve seen figures from 20% to 70% of management fees being paid on an ongoing basis for referrals. Are you aware of any message boards that RIAs frequent to exchange ideas about the biz?
Martin,
I’m not aware of any message boards. I’ve often thought it would be a good idea, but also don’t think I’d have time to visit.
Can you become an Independent RIA without opening your own broker dealer? Is it possible to work with a broker dealer and still be independent?
Hi Andrew,
I’m not sure I completely understand your first question, but you can be an RIA (they are independent) and not manage assets (hence there would be no b/d or custodian as it’s called in the RIA world). Yes you can work with a b/d and still be independent. You would need to find an independent broker dealer. You can’t work for a large “wirehouse” like Merril and be independent though.
I hope this helps.
I’m probably late to the party on this one, but I do have somewhat of an answer for Martin. The referral fees you’re referring to, if I understand you correctly, are solicitor agreements. Essentially, the solicitor would have to be registered with the RIA and a compensation schedule would have to be implemented. Registration entails being properly licensed.
The 70% number you stated seems a bit high and I’m not aware of anyone who pays that amount. I’m an independent advisor and I am in the process of initiating a solicitor’s agreement in my local market (Indiana) and the compensation will be far less than the 70% you mentioned. However, I will be paying him over a period of years.
The best message board I can think of would be to join some groups on LinkedIn that are investment related. Also, http://www.financial-planning.com is a site that has a series of message boards that might prove to be beneficial to you.
I suspect that certain types of solicitors might expect a higher referral fee than others. Maybe some financial professionals like accountants or other advisers would expect a bigger piece. I had been thinking in terms of 25% for referrals but after doing a web search I was seeing higher percentages.
In California, the solicitor needs to be registered as an RIA rep but doesn’t have to take the 65 exam.